International sanctions and exposure to risk are deterring international investors from participating in new oil and gas ventures in the Islamic republic
Though Iran’s offshore oil and gas fields contain some of the world’s largest reserves, the republic has largely failed to capitalise on this piece of good fortune. This is partly due to sanctions imposed on Iran by the United Nations’ Security Council since 2006 and partly to rising domestic demand. And despite oil reserves of 138.4 billion barrels – or 11.2 per cent of the world total – Iran has found it difficult to raise its crude output levels, with offshore production lagging at about 850,000 barrels a day (b/d).
Iran’s ageing fields have a natural annual decline rate estimated at 8 per cent onshore and 11 per cent offshore. According to the US Energy Information Administration, current Iranian recovery rates are just 20-25 per cent of reserves. Before the revolution in 1979, Iran’s oil output stood at more than 6 million b/d. Today, it is barely 4 million b/d.
- 138.4 billion - Iran’s oil reserves in barrels
- $20bn - Malaysia’s SKS Ventures proposed investment in Iran
- 25 per cent - Current Iranian recovery rates of reserves
The offshore South Pars field accounts for about half of Iran’s gas reserves and holds an estimated 14 trillion cubic metres of gas deposits. Discovered in 1990 about 100 kilometres offshore in the Gulf, South Pars is being developed in 28 phases.
The state-run National Iranian Oil Company (NIOC) set up a standalone firm, Pars Oil & Gas Company, specifically to manage the field’s development, but progress has been below expectations. The scheme’s official aim is to nearly triple current annual production to 475 billion cubic metres a year (cm/y) by 2020, which would make Iran accountable for 10 per cent of global gas output. However, most of the major developments at South Pars are well behind schedule.
While gas production has fallen short of expectations, major discoveries of new reserves continue to be made on a regular basis. In June 2009, Iran announced it had discovered huge deposits at the offshore Hormozgan field, which could potentially deliver up to 10 billion cubic feet of gas a day by 2020. New reserves of oil have also been discovered at the Abuzar oil field, near Kharg Island. Iran estimates 4 billion barrels of oil lie there.
Yet Iran’s investment strategy for developing new finds is muddled. Tehran announced in October 2008 that it was embarking on a fresh drive to revitalise two long-delayed liquefied natural gas (LNG) projects by attracting Gulf investors, after international energy majors said sanctions on Iran were deterring them from participating in the schemes.
But initial interest from investors in Abu Dhabi and Oman quickly fizzled out. Tehran then turned its attention to China and India to develop the LNG schemes, but as yet no deals have been struck.
Potential investors for offshore oil and gas projects have also been deterred by the complex structure of the buy-back contracts that Iran favours. Under these deals, international oil companies (IOCs) invest money up-front and then hand over a field to NIOC once production starts. The oil major recoups its costs at a pre-agreed rate of profit, based on global oil prices and the field hitting production targets.
In October 2008, it seemed Iranian oil ministry officials had changed strategy when they revealed plans to sign a first production-sharing deal with Brazil’s Petrobras for the development of crude deposits in the Caspian Sea.
But, more than a year on, the Petrobras deal has been scrapped due to concerns about the economic downturn, and a former exploration official at NIOC tells MEED no changes to its strategy are now planned.
“We are open to changes, including these production sharing contracts for high-risk fields like the Caspian, but, if the international partner cannot guarantee funding, we cannot proceed,” says the Tehran-based official.
While officials had hoped to increase Iran’s overall oil production to 4.5 million b/d by the end of 2010 from about 4.2 million b/d in December 2009, analysts now say simply retaining current production levels would represent a significant achievement.
Yet, despite the gloominess surrounding Iran’s offshore developments, interest from other international investors remains strong.
In December 2009, Malaysia’s SKS Ventures submitted a proposal to Tehran to invest $20bn in two oil and gas fields in the Gulf.
The problem remains turning such agreements into firm contracts.
“We are aware that we need more money coming in to help develop both offshore and onshore,” says the NIOC official.
“It is difficult in this climate, but we know that eventually outside money will come. There is too much oil and gas for it not to.”